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Facebook Challenges Groupon By Expanding Group Discount Service

The social media leader is seeking a bigger piece of the daily-deal discount market by expanding its Deals program to more cities.

The battle for group discount customers is heating up, as Facebook said it will expand its Deals program with a soon-to-launch cut-price offering similar to those provided by Groupon and LivingSocial.

The social media giant initially will test the service in San Francisco; San Diego; Dallas; Atlanta, and Austin, Texas, Facebook said in a statement on Friday.

"Local businesses will be able to sign up to use this feature soon, and people will be able to find Deals in the coming weeks," said Facebook.

Unveiled in the United States in November 2010 and Europe in January, Facebook Deals gives accountholders who share their information with participating businesses access to discounts and special offers. The tool integrates with Facebook Places, the social media site's location-based service that competes with Foursquare and Yelp, among others.

"You'll see a few different types of Deals: individual deals for a discount, free merchandise or other reward; friend deals where you and your friends claim an offer together; loyalty deals for being a frequent visitor to a place; and charity deals where businesses pledge to donate to a cause when you check in," Jon Fougner, a principal on Facebook's product marketing team, wrote in the company's blog when the service debuted in the U.S.

The new group-discount offering will give participating users access to price-breaks or other promotions from partners such as ReachLocal, Tippr, Gift City, PopSugar City, HomeRun.com, KGB Deals, Zozi, and Plum District, according to Bloomberg.

At South by Southwest Interactive (SXSW) on Saturday, location-based service SCVNGR disclosed its plans to segue into the daily deal market as part of the company's desire to reach the "hybrid space" that exists between location services, deals, local businesses, and pure forms of gaming, said Seth Priebatsch, SCVNGR's founder.

"Groupon and LivingSocial are not going to be worried in the short term about anything we do because they are so big and making so much money. But they are not doing a good job because it's not enough to do 'one and done-ers'," Priebatsch said, referring to shoppers who take advantage of a deal then never return to a business, the Guardian reported. "We haven't done it in a way that is mainstream yet, but as soon as we do they will have a lot to worry about."

Despite the allure of the group buying market, there are some hurdles. Groupon's lawyers are busy responding to three lawsuits, all filed separately by complainants upset about the expiration dates on their discounts.

In addition, 42% of businesses that had run a Groupon promotion said they would not do so again, citing unprofitability and bad customer experiences, according to a September study on Groupon effectiveness by Utpal Dholakia, an associate professor of management at Rice University. Groupon promotions were profitable for 66% of the businesses surveyed for the study, but unprofitable for 32%, the report found.

"Because the Groupon customer base is made up of deal-seekers and bargain shoppers, they might not tip as well as an average customer or be willing to purchase beyond the deal," Dholakia said, in a statement. "So employees need to be prepared for this type of customer and the sheer volume of customers that might come through."

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